Malaysian VC Ecosystem:

Facilitating the expansion of the venture

debt industry
 Why this research matters

• As Malaysia aspires to become a high-income nation, it is important to cultivate a culture which promotes
entrepreneurship and innovation into the society. Innovation and entrepreneurship drives productivity,
efficiency and creates quality and more highly skilled employment of “knowledge workers”. The mutual
relationship between economic growth and innovation brings increasing returns to the economy and this is
where the venture capital (VC) and private equity (PE) funding plays a pivotal role

• In line with this, ICMR’s report on “Catalysing the growth of the venture capital industry” mapped out the
current state of play in Malaysia’s venture capital industry, identified the challenges facing the industry and
formulated possible solutions to further catalyse the growth of the industry.

• The research report blended the findings of secondary research sources with independent dialogues with
a host of public and private venture capitalists, accelerators, family offices, private equity players and the
Securities Commission Malaysia (SC) to better gauge how the industry anticipate the way venture capital
may unfold in Malaysia.

• The report outlines development strategies that will transform the competitive dynamics of Malaysia’s
venture capital industry. The strategies aim to

❖ Expand the role of the capital market in financing new ventures and small-to-medium sized entities,

❖ Widening ownership of assets through further liberalisation of VC industry, as well as

❖ Adopting a more centralised and integrated form of cooperation between the Government and
private sector
2
 Why this research matters (cont’d)

• To achieve these strategies, key recommendations were designed to be considered by the policy-makers
in a holistic manner, with an understanding of the interconnected elements of each recommendation and
how its works in an integrated ecosystem

• The recommendations include:

o Restructuring and privatisation of some existing public venture capital,

o Centralised government agency to provide an equity pool for grants, seed investments & matching
funds,

o Establishment of a Funds-of-Fund model,

o Creation of a single platform for market access,

o Facilitate expansion of venture debt sector,

o Review existing pre-conditions for tax incentives,

o Create a one-stop centre which acts as an information gateway for Malaysia’s VC ecosystem,

o An inter-ministerial council with a participatory approach

3
 Why this research matters (cont’d)

• To complement the VC industry, it is critical to ensure that debt financing is sufficiently available in
the ecosystem and are able to meet the different criteria across the entire VC value chain

o Venture debt allow start-ups to enjoy enhanced capital efficiency through reduced dilution and
accelerated growth at a lower cost to the business

o VD in some jurisdictions complement venture equity financing, and fills a space not well served
by banks. In situation where VC money is not easily available, venture debt helps lengthen
runway and allows businesses to have more time to experiment with strategies

o VD may also complement and reduce government’s loan financing schemes burden via private
sector participation

• In line with this, ICMR delved into studying the venture debt market in more detail. This presentation
is divided in the following sections:

o Overview of global private debt industry

o Overview of global venture debt industry

o State of play for Malaysia venture debt industry

4
Global Private Debt Industry
A brief overview
 Overview of the global private debt industry

• Credit extended to companies/projects bilaterally & originate by non-FIs lenders

• Large & diverse Private Debt (PD) ecosystem — Asset managers, private equity firms, business
development companies & hedge funds
- E.g. Hercules, Cerberus, Hamilton Lane, Trifecta Capital, Innoven Capital

• Types of Private Debt:

- Direct lending (senior secured loans)
- Mezzanine (convertible debt-equity loans)
- Distressed
- Special situations
- Venture debt (loans with equity-kicker)

• Increasing use of direct lending & venture debt to supply funding to mid-market borrowers:
1. Growth capital. Term-loan used to augment equity round, finance M&A activity & OPEX
2. Accounts receivable financing. Revenue-generating companies to borrow against their
accounts receivable (e.g. MRR credit facility)
3. Equipment financing. Typically structured as lease or purchase of equipment (e.g. network
infrastructure, manufacturing, R&D, etc.)

6
 Booming of global private debt industry and poised
to hit US$1 trillion AUM

• Capital Available for Investment:

Private debt industry currently has
Private Debt Assets under Management, 2006 – 2018 $769 billion in committed capital
US$ billion
Committed/ Uncalled Capital • Industry grew 5x in size since 2006,
Unrealized Value when AUM stood at $147 billion

• Breakdown of AUM as at 2017:

a) Distressed debt (35%)
421 b) Direct lending (27.9%)
387 c) Mezzanine (22.9%)
337 767
279 297
d) Special situation (12.5%)
240 268 e) Venture debt (1.7%)
215
135 177
106
75 195 175 214 217
246 • Uncalled capital (dry powder) reach
72 99 111 105 117 131 132 $246 billion as at end 2017

• Dry powder grew 11.8% between

2006-2017, and over 13.4% compared
to 2017

• Expected to reach US$1 trillion AUM

Source: Preqin Global Private Debt Report March 2018 7

 Global private debt fundraising has exceeded $100
billion for the past four years

Global private debt fundraising by closing year 127

$ billion
109
100 102 100

77
71
65

42 44

24

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Private debt funds 97 59 79 86 107 152 138 171 157 161 139
(#)

Average fund size 1,029 410 528 510 606 505 517 598 634 791 781
($ million)

• Private debt fundraising softened in 2018 (-15% versus 2017), but long-term growth trend remains
intact

• PD fundraising GAGR (2013-18) grown 8.9% outpaced PE (7.8%) & closed-end real estate (4.4%) on
the back of sustained low interest rates and a long economic expansion

Source: Private markets come of age: McKinsey Global Private Markets Review 2019 8
 Significant growth in investors base for the private
debt space

Make-up of Investors in Private Debt by Type, 2017

Percentage (%) • Institutional investors continue to
outnumber wealth/asset managers
Wealth
Fund of Funds
Other, 14% Manager, 6%
Manager, 6% • Private sector pension funds (16%),
Asset public pension funds (13%) and
Manager, 6% foundations (13%) are the most
Family
Office, 8%
prominent investor types in private
credit space
Insurance
Private • Public debt markets are not deep in
Company,
9% Sector many parts of the world. As access to
Pension bank loans and high-yield issuance
Fund, 16%
Endowment diminishes, private debt investors step
Plan, 9% in to fill the void
Public
Pension
Foundation, Fund, 13%
13%

Source: Institute for Private Capital; Performance of Private Credit Funds: A First Look.
PitchBook, Welcome to the private debt show white paper.
Preqin Global Private Debt Report March 2018. 9
 Evolution of the global private debt industry between
2016 - 2018

Make-up of Investors in Private Debt by Location, 2016-2018 • Over 3,100 institutional investors
Percentage (%)
(Jan 2018) actively investing in
private debt opportunities:
6% 8% 8%
6% o +700 investors since Jan 2017
9% 11%
o +1,200 investors since Jan 2016
26%
25% 24% • Strong concentration of investors in
North America (57%) and Europe
(24%)

• Increase in Asia-based investors:

o South Korea (+36%)
62% 58% 57% o China (+52%)
o India (+110%)

• Global fund managers seeking

alternative investments due to low
Jan-16 Jan-17 Jan-18
interest rate environment & lack of
North America Europe Asia ROW SME funding

Source: Preqin Global Private Debt Report March 2018 10

 Strong Risk-Adjusted Returns Across Private Debt
Strategies

Private Debt: Risk/Return by Fund Type (All Vintages)

Percentage (%)

Source: Preqin 5th Annual Private Debt London 2019 Conference (March 2019) 11
Global Venture Debt Industry
Debt financing for high-growth start-ups & SMEs
 Brief overview of the global venture debt

• Venture debt is generally deployed by way of senior, secured non-convertible debenture, and
accompanied by equity options

• General characteristics of venture debt:

a) Have raised equity financing rounds from venture capital

b) High-growth businesses to acquire working capital without giving away equity during in-
between funding rounds

c) Periodic income distribution along with equity kicker (e.g. warrant)

d) Interest – Typically floating rate

Examples of venture debt participants globally

Financial institutions Venture debt funds Micro-funding marketplace

Barclays, Silicon Valley Bank, Hercules Capital, Horizon OnDeck, Lending Club,
Square 1 Bank, DBS Bank Technology, TriplePoint Ventures, Funding Circle, Prosper, SoFi,
Innoven Capital & Trifecta Capital Zopa, Kabbage, Credit
Karma..

13
Difference between venture debt and other
forms of credit

14
 Overview of the global venture debt industry assets
under management…

Global venture debt assets under management CAGR

US$ billion (2010-2017)
North America Europe Asia ROW
0.29
0.31 ROW +7.2%
1.56
1.72 Asia +180.0%
1.3
1.5 Europe +12.6%
0.11
0.13 0.69
0.65 North America +13.8%
0.15 1.0 1.3
0.16 0.01
0.18 0.01 1.1
0.01 0.9
0.17 0.7
0.6 11.0
0.18 10.1
0.6
8.0 8.1
6.3 6.9
5.5 5.6
4.5

2010 2011 2012 2013 2014 2015 2016 2017 Jun-18

• North America continues to dominate the global venture debt space, representing 73.4% of total venture
debt AUM, followed by Asia (12.6%), Europe (11.1%), and Rest of the World (2.9%)

• Asia achieved highest growth annually (180%), followed by North America (13.8%), Europe (12.6%) and
ROW (7.2%)

Source: Preqin database 15

 South Asia & Greater China achieving highest growth
in venture debt deals

Global venture debt deals

US$ million 1,131 CAGR
1,372 (2010-2018)

America +4.6%
6,554
4,010 Europe +9.5%
627 South Asia + +45.8%
803
894 2,953 1,380
Greater China
1,139
625 2,198
ROW +22.8%
300
128 140
121 40 123 782 515
68 375
1,065 426180 2,143 9,491
7,903 8,201
271 6,324 6,786
4,797 5,668
4,730
3,363

2010 2011 2012 2013 2014 2015 2016 2017 2018

America Europe South Asia + Greater China ROW

• 2018 global VD deals concentrated on America (61%), followed by Europe (20%), South Asia (13%) &
ROW (5.7%)

• South Asia/Greater China recorded highest growth of 45.8% from 2010-2018

• Growth in South Asia driven by Greater China (151%) vis-à-vis South Asia (25%) from 2010-2018

Source: Preqin database 16

 Various structures utilised in the global private
credit space to facilitate lending to SMEs

• Venture debt as a form of credit solution for growth-stage ventures to finance operation expenditures

• Encourage development of many types of capital providers to ensure availability of funds to match
risk/return profile of investors

Venture Debt Private Credit Fund

Country India, Singapore & ROW North America

DFIs or Alternative investment fund Business Development Companies (Close-ended

Business vehicle
structure investment vehicle)
Generally to finance early-stage or Finance middle-market companies (e.g.
Mandate venture companies mezzanine funds, distressed funds, direct lending
funds & other strategies)
Managerial
May or may not involve in Significant involvement in management &
assistance to
management & operations operations
borrower
Market size US$13.6 billion (June 2018)* US$33.8 billion AUM**
Silicon Valley Bank, Barclays &
Examples of Hercules Capital, Horizon Technology,
Innoven capital, Trifecta Capital
providers TriplePoint Ventures, Hamilton Lane & etc.
Advisors & etc.

Source: *Preqin database, BDCinvestor.com

**Estimate based on 44 BDCs listed on US Exchanges (exclude unlisted BDCs).
17
 Venture debt gaining significant traction in Asia

Singapore (Venture debt development progress)

• DBS launched (2015) “in-house venture debt” for tech start-ups, partnering Vertex Venture, Monk’s Hill
Ventures & Golden Gate Ventures. Must raised $1 million (Series A), 1 year operation & commercially
viable business model.
• Temasek & UOB bought SVB India for $48 million (2015) & rebrands it as InnoVen Capital
• Enterprise Singapore launched Venture Debt Programme (2015). Enterprise Singapore shares 50% of
the risk of loan defaults with Participating Financial Institutions (PFIs).
o Interest rates, repayment structures, collateral/warrant structures determined by the PFIs
o Ticket size S$5 million & warrants will be required
o Companies registered & operate in Singapore (30% local shareholding) & group annual sales of
up to S$100 million

India (Venture debt development progress)

• 1st credit SME programme by Citibank India (2005). Venture Capitals (IvyCap Ventures Advisors &
Unicorn India Ventures) subsequently diversified to launch venture debt funds
• SEBI extend perimeter of regulation to unregulated funds via AIF (2012)
• Liberalisation to allow insurers invest in Category I & II Alternative Investment Funds by IRDA (2017)
• Market reach $1.2 billion debt finance in 2018 (represents 8.8% of total $13.7 billion start-ups
investments)

Source: SEBI, Economictimes India, Enterprise Singapore, e27.co, straitstimes.com, 18

Malaysia Venture Capital Ecosystem
State of play
 VC industry experienced growth over the last
decade

Malaysia VC industry AUM

RM million • Amount of committed funds
7,154
7,003 under management has
6,509 grown at 6% CAGR to RM6
6,211 billion
5,959 6,085
5,698 5,796
5,347 5,460 • Malaysian government
successfully set up the
4,570 preconditions phase for the
development of local venture
capital industry driven by a
3,308 desire to support innovation
to move the country toward a
high-income nation

• In light of the current

evolution within the global VC
ecosystem, the role of
venture capital in financing
high growth ventures and
SMEs has to be re-assessed
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Note: Funds committed based on funds outsourced to VCC/VCMC and does not include funds invested directly
Source: Securities Commission Malaysia 20
Public VCs established to fill the funding gap;
over the years funding intensified…

• Nurture infant ICT companies & current fund size over RM1 billion
• Funded by Government via loan & equity structure
• Investments – Direct & Outsource Partners Programme with foreign players &
local players

• Specialize in E&E sector & current fund size over RM322.5 million
• Funding structure: Loans and RCPS
• Investments – Direct

• Incorporated with a mandate to seed fund potential & high-calibre tech start-ups
through its Cradle Investment Programme. Has helped fund over 700 Malaysian
tech start-ups
• Role expanded from grant provider to investor through the establishment of Cradle
Seed Ventures in 2015 and following its portfolio expansion to equity investment
(DEQ800) in 2017

• Launched to spur Malaysia's creative industry & current fund size over RM200
million allocated
• Further expansion to establish private equity fund
• Funding structure: Loans & equity
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… established various alternative fund raising
vehicles to complement the VC industry

• Malaysia Debt Ventures established to provide flexible/innovative loan & Shariah

financing facilities to develop high-impact and technology-driven sectors

• MDV’s mandate expanded to include ICT, Biotechnology and Green Technology

• RM11.26 billion disbursed to 711 approved companies via creation of 814 credit
lines

• Equity crowdfunding & peer-to-peer lending introduced to democratize financing

and complement the VC industry

• As at end June 2018, there are 7 ECF and 6 P2P players. Total funds raised across
ECF and P2P was RM70 million with over 4,000 investors. 651 deals were
successful and 150 MSMEs were able to raise funding

• LEAP market established as an alternative market for SMEs & companies to raise
funds through a single platform

• Feeder market for potential SME seeking listing on ACE/MAIN market

22
 Maturity of Malaysia VC ecosystem reflected in the
breath of players

Examples of Malaysia’s financiers at various business cycle

Source: Ekuinas 23
 Debt financing a compliment to equity financing for
SMEs and entrepreneurs

Fund providers Opportunities for private debt

development:

• Ministries & agencies Grants • High number SMEs/ mid-

market companies (907,065)
in Malaysia
- Too small to approach
Players bond market or
insignificant for FIs
Capital
• Private VCs/ Accelerators/
Alternative platforms • Need to be more than just
pure lenders
• Venture debt Debt New ventures - e.g. look at entire
/SMEs business & growth
prospects rather than just
credit history
Regulators
Policy • Greater financial engineering
• Securities Commission to enable pursue expansion
• Bank Negara Malaysia business plans

Source: SME Corporation Annual Report 2017/2018 24

 Opportunities to further expand debt financing as in-
between rounds of financing for entrepreneurs

• SME banking loan outstanding grew 30% to RM318.1b (3Q18) vs. RM244.9b (2014).

• Stricter bank regulations & increased compliance costs shifted risk culture of banks

• RM21 billion credit financing gap for SMEs to be filled by alternative financing (e.g. crowdfunding, peer-to-
peer lending, factoring and leasing)*

• Southeast Asia’s internet economy estimated to exceed $200 billion by 2025

Note: MDV’s statistic measured based on gross financing portfolio and

latest annual report 2017

Source: Malaysia Debt Ventures Annual Report

Bank Negara Malaysia
Businessinsider.sg
*BNM Financial Stability & Payment Systems Report 2016
25
 Growth in P2P investments in Malaysia signals the
potential room for venture debt financing

• Sept 2017 – Dec 2018. Amount raised by ECF grew to RM48.8 million (110%) compared to P2P growth of
2,344% amounting to RM212.7 million
• Sept 2017 – Dec 2018. Successful ECF campaigns grew marginally (65%) from 31 to 51 campaigns,
while P2P grew 5,593% from 44 to 2,505 campaigns
• P2P operators form strategic partnerships with FIs & financing companies for liquidity

Total amount successfully raised No. of successful campaign

2,505
RM million (#)

P2P** ECF ECF P2P**

212.65

1,160

80.28 628

37.15

8.7 48.87
32.74 38.36 44
23.18
31 37 40 51
Sep-17 Dec-17 Jun-18 Dec-18 Sep-17 Dec-17 Jun-18 Dec-18

Source: Securities Commission Malaysia Annual Report 2018

Note: All statistics are cumulative since inception
**Successful campaigns for P2P includes repeated issuance for a single SME 26
 Need to facilitate expansion of venture debt sector

• Essential to nurture the Malaysian venture debt fund industry through a structured regulatory framework
& broaden emerging ventures/SMEs credit financing options:

• Venture debt experiences in some prominent jurisdictions:

o North America — Close-ended Business Development Companies (listed & unlisted) registered
as investment advisers with US SEC

o India — Majority in “Trust” and registered as category-II Alternative Investment Fund (SEBI)

o Singapore — Registered with MAS as licensed VC fund management company (e.g. Genesis
Alternative Ventures)

Moving forward:

• Need to expand scope of Malaysia VC regulations to facilitate expansion of venture debt sector

• Public sector to drive risk-sharing schemes via Venture Debt Pilot Programme to draw private debt funds
providers

• Provide framework for listing of close-ended venture debt funds

27
THANK YOU